February 2017

Reduce Tax , India Taxes, Save Money in tax , Year end TAX planning

Five SMART things to do in Feb / March from TAX perspective.

Last 2 months left for financial year end.
Five SMART things to do in Feb / March from TAX perspective. (Financial Year End 2016-2017 ends in March)
1. Make sure that the 80C investments are done 1.5L for you and spouse(if applicable)
2. Check your short term Capital Gains (from Stocks/MF) – if possible plan to REDUCE GAIN by realizing losses (if any) from underperforming MF or Stocks
3. Check your Other sources of Income and make sure to pay timely Advance TAX to avoid interest cost later.
4. Do not generate income by means of selling assets (House/MF/Stocks/Bonds/etc) in Feb / March. POSTPONE it to April (next financial year)
5. Make timely declarations to your company for components like HRA/Interest/Loss from house property/80C declarations etc.
Conceptually, All the above helps INCREASE your monthly Cash Flow.
Plan to keep things SIMPLE. Simplicity is the way to BRILLIANCE….
… Kapil

October 2012

Cost of Inflation Index AY 2012-13 ~ Long term Capital Gains ~ Double Indexation

Double Indexation, FMP, Cost of Inflation Index AY 2012-13 ,To compute Long term Capital Gains Indexation, AY 2012-13, Tax Planning, Fixed Maturity Plans, Debt Funds Taxation, Real Estate Capital Gains
COST INFLATION INDEX TABLE – FINANCIAL YEAR 1981-82 ONWARDS:
Assessment Year (AY)
Financial Year (FY)
Cost Inflation Index (CII)
2014-15
2013-14
2013-14
2012-13
852
2012-13
2011-12
785
2011-12
2010-11
711
2010-11
2009-10
632
2009-10
2008-09
582
2008-09
2007-08
551
2007-08
2006-07
519
2006-07
2005-06
497
2005-06
2004-05
480
2004-05
2003-04
463
2003-04
2002-03
447
2002-03
2001-02
426
2001-02
2000-01
406
2000-01
1999-2000
389
1999-2000
1998-99
351
1998-99
1997-98
331
1997-98
1996-97
305
1996-97
1995-96
281
1995-96
1994-95
259
1994-95
1993-94
244
1993-94
1992-93
223
1992-93
1991-92
199
1991-92
1990-91
182
1990-91
1989-90
172
1989-90
1988-89
161
1988-89
1987-88
150
1987-88
1986-87
140
1986-87
1985-86
133
1985-86
1984-85
125
1984-85
1983-84
116
1983-84
1982-83
109
1982-83
1981-82
100

The cost of inflation index is useful for income-tax assesses in the computation of tax on long-term capital gains (for indexation purposes). In the previous two years, the cost inflation index rose 10 per cent and 12.5 per cent, respectively.

A cost inflation index helps reduce the inflationary gains, thereby reducing the long-term capital gains tax payout for the taxpayer. Currently, the income-tax law allows long-term capital gains to be computed after adjusting for inflation (Debt Mutual Funds, FMP’s, Real Estate Gains etc.) .

The cost of acquisition as well as the cost of improvement is adjusted for inflation between the date of purchase and date of sale (through the cost inflation index) before the long-term capital gain is ascertained. (~ The Hindu)

Assume, if the investor invested Rs 1,00,000 in the growth option on March 30, 2009 and redeemed the investment on April 2, 2010 for Rs 1,10,000 

The investment happened in financial year 2008-09, for which the government has declared cost inflation index of 582.

The investor redeemed the investment in financial year in 2010-11, for which the cost inflation index is 711.

The capital gains is Rs. 110,000 minus Rs. 100,000 i.e. Rs. 10,000.

The holding period is 367 days, which is more than 1 year. Therefore, it is a long term capital gain.

The maximum tax the investor has to bear is 10% (plus surcharge plus education cess) on the capital gain of Rs. 10,000. Thus, the maximum tax payable would be Rs. 1,000 (plus surcharge plus education cess).

Investor can benefit from indexation. The indexed cost of acquisition is Rs. 100,000 X 711 ÷ 582 i.e. Rs. 122,165. This is higher than the selling price of Rs. 110,000. Thus, the investor ends up with a long term capital loss of Rs. 12, 165. This can be set off against long term capital gains, as discussed in the next section.

Another point to note is that although the investor held the investment for slightly more than a year, the investor gets the benefit of indexation for two years viz. 2009-10 and 2010-11. Hence the name “double indexation” for such structures.

Mutual funds tend to come out with fixed maturity plans towards the end of every financial year to help them benefit from such double indexation. 

Largely investors are unaware about this benefit. This benefit can and should be taken by investing towards the end of a financial year, if the investor has surplus funds, because the capital gains virtually becomes tax free due to the double indexation benefit.

How are Mutual Fund Gains Taxed?

Capital Gains Tax, Equity Mutual Funds, Debt Mutual Funds, Indexation Benefits, FMP's, Balanced Mutual Funds.

Capital Gain is the difference between sale price and acquisition cost of the investment. Since mutual funds are exempt from tax, the schemes do not pay a tax on the capital gains they earn.

Investors in mutual fund schemes however need to pay a tax on their capital gains as follows:

Equity-oriented schemes

– Nil – on Long Term Capital Gains (i.e. if investment was held for more than a year) arising out of transactions, where STT has been paid

– 15% plus surcharge plus education cess – on Short Term Capital Gains (i.e. if investment was held for 1 year or less) arising out of transactions, where STT has been paid

– Where STT is not paid, the taxation is similar to debt-oriented schemes

Debt-oriented schemes

– Short Term Capital Gains (i.e. if investment was held for 1 year or less) are added to the income of the investor. Thus, they get taxed as per the tax slabs applicable. An investor whose income is above that prescribed for 20% taxation would end up bearing tax at 30%. Investors in lower tax slabs would bear tax at lower rates. Thus, what is applicable is the marginal rate of tax of the investor.

– In the case of Long Term Capital Gain (i.e. if investment was held for more than 1 year), investor pays tax at the lower of the following:

— 10% plus surcharge plus education cess, without indexation

— 20% plus surcharge plus education cess, with indexation

Indexation means that the cost of acquisition is adjusted upwards to reflect the impact of inflation. The government comes out with an index number for every financial year to facilitate this calculation.

For example, if the investor bought units of a debt-oriented mutual fund scheme at Rs 10 and sold them at Rs 15, after a period of over a year. Assume the government’s inflation index number was 400 for the year in which the units were bought; and 440 for the year in which the units were sold. The investor would need to pay tax on the lower of the following:

— 10%, without indexation viz. 10% X (Rs 15 minus Rs 10) i.e. Rs 0.50 per unit

— 20%, with indexation.

Indexed cost of acquisition is Rs 10 X 440 ÷ 400 i.e. Rs11. The capital gains post indexation is Rs 15 minus Rs 11 i.e. Rs 4 per unit. 20% tax on this would mean a tax of Rs 0.80 per unit.The investor would pay the lower of the two taxes i.e. Rs0.50 per unit.

Here’s how different funds are taxed and who should invest in them:

Debt schemes held for short term: If you fall under 10% tax bracket, growth option would be better—as there is no DDT (13.519%). Dividend option is better if an individual falls under higher income brackets (20% or 30% & above) as the DDT is lower. Debt schemes if held for short term ( less than one year), then capital gains tax will added to income and taxed according to the slab.

Debt funds held for long term: If you want to invest in debt schemes for more than a year, growth option is a better choice. In case of debt schemes, long term capital gains are taxed at 10% without indexation and 20% with indexation.

This article – Guide to debt funds & article – Debt funds can prove beneficial from Economic times further articulates the tax advantages & other benefits of investing in debt funds. 

Source : NISM

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